The Commerce Department reported last week that 1Q GDP increased more than previously reported (0.7%) and more than the pre-report consensus (0.9%) to 1.2% (annual rate). While that was better than expected, GDP growth in the 1Q was anemic at best.

Yet a second report last week, the Chicago Fed’s National Economic Activity Index, rose to the highest level since late 2014, well above expectations. This report adds credence to the argument that economic growth is accelerating in the 2Q.

The question is whether the economy is growing by 3.0-3.5% (annual rate) in the 2Q as some forecasters seem to believe, or more like 2.0-2.5% as myself and others find more likely. I’ll give you my thoughts as we go along today.

Following those discussions, we’ll turn our sights to President Trump’s controversial federal budget proposal for fiscal year 2018 which was released last week. The president’s budget proposed lowering the rate of growth in federal spending in many areas, and thus was roundly criticized in the media and by Democrats.

While Trump’s budget clearly has its flaws, it is encouraging to see a president attempt to reduce the rate of growth (not cuts) in federal spending. I’ve included a very interesting article by CNBC’s Larry Kudlow that explains how to view Trump’s latest budget proposal.

1Q GDP Revised Up to 1.2% From 0.7%, Better Than Expected

The Commerce Department reported on Friday that “real” (inflation-adjusted) GDP grew at a 1.2% annual rate in the 1Q, an upward revision from its advance estimate of 0.7% at the end of April. The latest report was better than the pre-report consensus estimate of 0.9%.

Most of the upward revision was due to stronger consumer spending as well as a further increase in business investment since the initial reading last month, while inventories were revised down.

The brightest spot in Friday’s GDP report was that business fixed investment grew at an 11.4% annual rate in the 1Q, the fastest pace in five years. The most disappointing news was that corporate profits slipped 1.9% in the 1Q.

Despite that, corporate profits remain 3.7% higher than a year ago, and much of the weakness in the 1Q was due to an unusually large reduction in the value of inventories which is not expected to continue. As a result, most forecasters expect corporate profits to continue to improve in the year ahead.

Since the economic recovery started in mid-2009, real GDP has been growing at an average annual rate of 2.1%. Most forecasters continue to expect faster economic growth over the next couple of years. Yet not significantly faster until policymakers in Washington, DC start cutting tax rates, reducing regulations and moving toward healthcare reform.

In terms of monetary policy, nothing in Friday’s better than expected GDP report should prevent the Federal Reserve from raising rates again in June. In fact, it would now be a big surprise if Yellen & Company do not raise the Fed Funds rate another quarter-point on June 15. I’ll have more to say about this before the next FOMC meeting on June 14-15.

Fed’s National Economic Activity Index Hits Three-Year High

The Chicago Fed’s National Economic Activity Index rose to the highest level since 2014 last month according to a new report out last week. The National Activity Index includes measures of manufacturing, productivity, factory orders, consumer spending, hiring, incomes, etc.

According to the Chicago Fed, its National Activity Index rose to +0.49 in April from 0.07 in March, its highest level since November of 2014.

The Index is a weighted average of 85 monthly economic indicators with a baseline average value of zero. A zero value for the Index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth (in standard deviation units); and positive values indicate above-average growth.

The fact that this Index rose to the highest level since late 2014 lends credence to the argument that economic growth is accelerating in the 2Q. The question is whether the economy is growing by 3.0-3.5% (annual rate) in the 2Q as some forecasters seem to believe, or more like 2.0-2.5% as myself and others find more likely.

The first official government estimate of 2Q GDP won’t be out until near the end of July, but we’ll get more indications as we move through June. I’ll keep you posted.

Trump Budget Far From Perfect, Has Flaws, But a Good Start

The annual federal budget soap opera has begun with the release of President Trump’s FY2018 budget last week -- with many in Congress, as always, declaring it “dead on arrival.” Nothing new there.

The mainstream media declared Trump’s budget barbaric and outrageous, citing hundreds of heartless budget cuts -- most of which are actually spending increases but at a slower rate of growth than the so-called “baseline” increases.

There are things not to like about Trump’s budget, on both sides of the political aisle, but there are several areas which deserve praise. In particular are the incentives to get able-bodied Americans off the welfare/dependency rolls and back into the workforce.

Yet rather than give you my analysis of these proposed work incentives and the new budget in general, here’s a good review by CNBC’s Larry Kudlow, one of my favorite writers, which appeared in Investor’s Business Daily on Saturday (emphasis is mine).

Trump Budget is a Revival of the Clinton/Gingrich Growth Mode

by Lawrence Kudlow -- May 27, 2017

When OMB [Office of Management & Budget] director Mick Mulvaney unveiled the new Trump budget, he used language that is so important -- although we haven’t heard it in so many years.

To paraphrase Mulvaney, the measure of budget success for the Trump administration is not how much federal assistance is given out, but how many people leave government dependency and join the private labor force as full-fledged workers.

The last time I heard a talk like this was over 20 years ago when President Bill Clinton teamed with Speaker Newt Gingrich to pass welfare reform. They argued that tighter eligibility, time limits, work-search mandates, and better training programs would move people from welfare to workfare.

Critics said wait, no -- tougher welfare requirements will throw millions onto the streets with no federal assistance. Turns out they were wrong. Millions moved into the labor force to work productively, grow the economy, and provide themselves with new self-esteem and happiness.

This point on happiness is one of my favorites. I learned it from AEI president Arthur Brooks, who has done a number of quantitative surveys that clearly show how people who work for a living are far happier than those who depend on government assistance.

So now, over 20 years later, Mick Mulvaney is talking workfare over welfare. And, of course, the left-wing screaming has begun.

But something must be done. Almost eight years after the recession trough, government benefits for welfare, food stamps (44 million people receive food-stamp benefits today, compared with 14 million in December 2007), Medicaid, and Social Security Disability Insurance are still exploding.

So by tightening eligibility and putting back time limits and various work requirements, millions will return to the labor force, just as they did in the mid-1990s.

University of Chicago economics professor Casey Mulligan calls this the redistribution recession. That is, the best of government intentions have actually backfired by reducing incentives to work and earn.

The expansion of food stamps, welfare, health-insurance subsidies, unemployment assistance, and disability assistance have led to unintended consequences and perverse after-tax incentives, such that it pays more to stay on assistance than to go to work. At the working-poor margin, taking a job may rob you of Obamacare subsidies. So better off not to work.

A couple of years ago, Mulligan estimated that the marginal tax rate -- the extra taxes paid and subsidies foregone as the result of working -- had increased from 40 percent to 48 percent. Progressives hate this viewpoint.

But Mulligan summed it up this way: “Helping people is valuable but not free. The more you help low-income people, the more low-income people you have. The more you help unemployed people, the more unemployed people you’ll have.”

The Left is also up in arms because Trump is “slashing” the budget. He’s taking food out of the mouths of babes! Killing people for lack of health insurance! Throwing granny in the wheelchair off the side of the cliff!

But here’s a big-picture point: In most cases, the new budget merely slows the rate of spending growth.

Manhattan Institute economist Diana Furchtgott-Roth argues that what the media calls “cuts” are really increases. She’s right. The so-called current-services baseline goes up every year at 4, 5, 6, 7 percent or more. So any reduction in the rate of increase is not a cut from last year’s spending level.

The Trump budget proposes to raise government spending from $4 trillion today to $5.7 trillion in 2027. That’s not a cut. Furchtgott-Roth points out that the new budget proposes to increase federal Medicaid spending from $378 billion today to $524 billion in 2027. That ain’t a cut either. It’s an increase.

Furchtgott-Roth also notes that America has over 90 anti-poverty programs, 17 food-aid programs, and 22 housing-assistance programs. You think this has been a success? I don’t.

Adding up each and every new year between now and 2027, the federal government will spend about $55 trillion. Do we think that’s enough? And the Trump budget would curb that by about 7 percent, or roughly $4 trillion. That’s all that’s happening.

So Mick Mulvaney is right. This is a growth budget. Not because it destroys all federal assistance. But because it will reinstitute reforms put in place by Democrat Bill Clinton that will restore incentives to work and remove incentives to not work.

When people re-enter the labor force, it promotes growth. Workfare is better than welfare. And President Trump also aims for a big-bang growth booster with a cut in business tax rates for large and small companies along with immediate expensing and repatriation.

President is a mighty hard job. Even if he drains the swamp by just a wee bit, President Trump will still shake up the establishment. END QUOTE

As noted above, President Trump’s controversial FY2018 budget has its flaws, not to mention that it is void of any entitlement reforms. Yet it also has some bold elements to curb the out-of-control federal spending, for which he should get credit.

Unfortunately, the final budget that comes out of Congress (assuming we get one), will be a far cry from the budget President Trump proposed last week.

Keep All Your Financial Information in One Safe, Secure Place

I want to remind all of my clients and readers that we have a great tool for keeping all of your financial information digitally in one safe, secure place. It’s called Handing Down Your Legacy and it’s FREE of charge from Halbert Wealth Management.

The idea is to have all of your financial information (account numbers, contact info, etc.) in one electronic file for easy access. When there are changes to your financial information, you can easily update your records to keep them current.

You can download either of two digital versions of Handing Down Your Legacy, one in Microsoft Word format and a second that can be completed using the free version of Adobe Reader (available at www.adobe.com). Either version can be used to save your important information.

So be sure to get your free copy of Handing Down Your Legacy today. I really encourage you to do this and make sure your chosen loved ones know where this critical information is stored. I also recommend that you encourage your loved ones to download Handing Down Your Legacy to store their own financial information in one safe, secure place.

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.